Fund performance Class A shares of Columbia Value and Restructuring Fund returned -6.10% (excluding sales charge) for the second quarter. The fund underperformed both the Russell 1000 Value Index and the S&P 500 Index, which returned -2.20% and -2.75% respectively. For up-to-date performance information, please check online at columbiamanagement.com.
Market overview
The overall market experienced a slight loss in the second quarter, with the S&P 500 Index losing 2.75% and the Russell 1000 Value Index losing 2.20%. Once again, Europe dominated headlines, as it continued to grapple with sovereign debt problems. However, the relatively flat market results masked a focus by investors on primarily buying defensive companies, while ignoring or selling stocks with cyclical and international exposure. Industrials, commodities, financials and other cyclically-exposed companies underperformed dramatically through the quarter, while consumer staples, health care and telecommunication services gained. This led to the fund losing 6.10%, as exposure to energy and materials detracted from results.
This bias could persist until the November U.S. elections, as there is little to get excited about over the next few months, especially given signs of a weakening U.S. economy, combined with earnings disappointments. Industrial companies, in particular, have signaled sales declines in Europe and Asia, with the U.S. as a potential recent negative. Combined with lower earnings estimates, the market will likely remain range-bound.
In a world where there are disproportionate risks and muddling along seems like the most likely outcome, we felt it necessary and prudent to reduce certain cyclical exposures. Our focus has been to continue to upgrade the quality of the portfolio, a trend that has been in place since 2010. As a result, additions were made to consumer staple and health care spaces, with an emphasis on highly cash generative businesses with dividends or buybacks. We also reduced exposure to commodities and industrials where prolonged uncertainty may continue to detract from results.
Europe is an unknown quantity and the worst case scenario remains far worse than the market is pricing in. Conversely, should Europe get its act together and form a true fiscal union, the market may applaud in the near term, but it does little to fix the substantial debts that need to be reduced.
Contributors and detractors
Stable companies with exposure to the U.S. consumer outperformed in the second quarter. Telecommunication services and cable, in particular, did well, with Sprint and Comcast up. Union Pacific (railroad) also did well. Retailer TJ Maxx (TJX, Financial) continued its longer term performance with a gain, benefitting not just from U.S. exposure, but also from its focus on bargain shoppers.
In a reversal from the first quarter, chemicals, financials and materials detracted from performance in the second quarter. Brazilian oil company Petrobras (PBR, Financial) fell, as oil prices declined and capital expenditures ran ahead of production growth. Celanese (CE, Financial), a chemical manufacturer, declined on lower demand from Europe and China. JP Morgan, a diversified bank, suffered on trading losses, while global industrial Eaton declined on macroeconomic fears.
The fund changed several positions in a continued effort to upgrade the overall quality of holdings. Alpha Natural and Consol Energy, both in the coal industry, were sold. Methanex, a chemical producer, and Cliffs Natural Resources, an iron ore miner, were eliminated as well. Other names in industrials and financials were sold. New names added include Sprint (wireless), Comcast (cable), Johnson & Johnson and Abbott Laboratories (both in health care), Ebay (online sales and payments) and Blackrock (investment management).
Outlook
Absent a significant near-term catalyst, the market continues to trade close to fair value. The positive earnings momentum from the first quarter, and the last two years for that matter, is wearing off. This could put a cap on near-term market potential.
As before, the larger drivers of the market continue to be at the macro level, with politics in the European Union (EU) and U.S. playing an outsized role. It now appears unlikely that the U.S. will achieve any resolution to increased taxes or deficits until the election is over. The EU remains the primary source of concern, as debt resolutions are more painful and take longer than expected. Finally, slowing in Asia has not helped matters. This continued uncertainty is not good for general confidence and, therefore, the economy and corporate profits. However, if the cloudy macro picture begins to clear, we think the equity markets could enjoy a nice rally. The current weakening sentiment and a world of zero savings rates will provide the fuel.
As always, we will try to use the environment to our advantage and look for opportunistic investments among the uncertainty and volatility.
Investors should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. For a free prospectus, which contains this and other important information about the funds, visit columbiamanagement.com. The prospectus should be read carefully before investing.
Columbia Funds are distributed by Columbia Management Investment Distributors, Inc., member FINRA and managed by Columbia Management Investment Advisers, LLC.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.
Additional performance information: All results shown assume reinvestment of distributions and do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
The fund returns shown include the performance of Excelsior Value and Restructuring Fund, a series of Excelsior Funds, Inc. and the predecessor to the Fund, for periods prior to March 31, 2008.
1The returns shown for periods prior to the share class inception date (including returns since inception, which are since fund inception) include the returns of the fund's oldest share class. These returns are adjusted to reflect any higher class-related operating expenses of the newer share classes, as applicable. Please visit columbiamanagement.com/mutual-funds/appended-performance for more information.
Gross expense ratio: Fund expense ratios are calculated based on the Fund's average net assets during the Fund's most recently completed fiscal year (or based on estimated amounts for funds that have been in existence less than one year), and have not been adjusted for current asset levels. If adjusted for any decrease or increase in assets, expense ratios would be higher or lower, respectively, than the numbers shown above. Please see the Fund's prospectus for additional details.
The Russell 1000 Value Index measures the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values. The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks. It is not possible to invest directly in an index.
Market overview
The overall market experienced a slight loss in the second quarter, with the S&P 500 Index losing 2.75% and the Russell 1000 Value Index losing 2.20%. Once again, Europe dominated headlines, as it continued to grapple with sovereign debt problems. However, the relatively flat market results masked a focus by investors on primarily buying defensive companies, while ignoring or selling stocks with cyclical and international exposure. Industrials, commodities, financials and other cyclically-exposed companies underperformed dramatically through the quarter, while consumer staples, health care and telecommunication services gained. This led to the fund losing 6.10%, as exposure to energy and materials detracted from results.
This bias could persist until the November U.S. elections, as there is little to get excited about over the next few months, especially given signs of a weakening U.S. economy, combined with earnings disappointments. Industrial companies, in particular, have signaled sales declines in Europe and Asia, with the U.S. as a potential recent negative. Combined with lower earnings estimates, the market will likely remain range-bound.
In a world where there are disproportionate risks and muddling along seems like the most likely outcome, we felt it necessary and prudent to reduce certain cyclical exposures. Our focus has been to continue to upgrade the quality of the portfolio, a trend that has been in place since 2010. As a result, additions were made to consumer staple and health care spaces, with an emphasis on highly cash generative businesses with dividends or buybacks. We also reduced exposure to commodities and industrials where prolonged uncertainty may continue to detract from results.
Europe is an unknown quantity and the worst case scenario remains far worse than the market is pricing in. Conversely, should Europe get its act together and form a true fiscal union, the market may applaud in the near term, but it does little to fix the substantial debts that need to be reduced.
Contributors and detractors
Stable companies with exposure to the U.S. consumer outperformed in the second quarter. Telecommunication services and cable, in particular, did well, with Sprint and Comcast up. Union Pacific (railroad) also did well. Retailer TJ Maxx (TJX, Financial) continued its longer term performance with a gain, benefitting not just from U.S. exposure, but also from its focus on bargain shoppers.
In a reversal from the first quarter, chemicals, financials and materials detracted from performance in the second quarter. Brazilian oil company Petrobras (PBR, Financial) fell, as oil prices declined and capital expenditures ran ahead of production growth. Celanese (CE, Financial), a chemical manufacturer, declined on lower demand from Europe and China. JP Morgan, a diversified bank, suffered on trading losses, while global industrial Eaton declined on macroeconomic fears.
The fund changed several positions in a continued effort to upgrade the overall quality of holdings. Alpha Natural and Consol Energy, both in the coal industry, were sold. Methanex, a chemical producer, and Cliffs Natural Resources, an iron ore miner, were eliminated as well. Other names in industrials and financials were sold. New names added include Sprint (wireless), Comcast (cable), Johnson & Johnson and Abbott Laboratories (both in health care), Ebay (online sales and payments) and Blackrock (investment management).
Outlook
Absent a significant near-term catalyst, the market continues to trade close to fair value. The positive earnings momentum from the first quarter, and the last two years for that matter, is wearing off. This could put a cap on near-term market potential.
As before, the larger drivers of the market continue to be at the macro level, with politics in the European Union (EU) and U.S. playing an outsized role. It now appears unlikely that the U.S. will achieve any resolution to increased taxes or deficits until the election is over. The EU remains the primary source of concern, as debt resolutions are more painful and take longer than expected. Finally, slowing in Asia has not helped matters. This continued uncertainty is not good for general confidence and, therefore, the economy and corporate profits. However, if the cloudy macro picture begins to clear, we think the equity markets could enjoy a nice rally. The current weakening sentiment and a world of zero savings rates will provide the fuel.
As always, we will try to use the environment to our advantage and look for opportunistic investments among the uncertainty and volatility.
Investors should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. For a free prospectus, which contains this and other important information about the funds, visit columbiamanagement.com. The prospectus should be read carefully before investing.
Columbia Funds are distributed by Columbia Management Investment Distributors, Inc., member FINRA and managed by Columbia Management Investment Advisers, LLC.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.
Additional performance information: All results shown assume reinvestment of distributions and do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
The fund returns shown include the performance of Excelsior Value and Restructuring Fund, a series of Excelsior Funds, Inc. and the predecessor to the Fund, for periods prior to March 31, 2008.
1The returns shown for periods prior to the share class inception date (including returns since inception, which are since fund inception) include the returns of the fund's oldest share class. These returns are adjusted to reflect any higher class-related operating expenses of the newer share classes, as applicable. Please visit columbiamanagement.com/mutual-funds/appended-performance for more information.
Gross expense ratio: Fund expense ratios are calculated based on the Fund's average net assets during the Fund's most recently completed fiscal year (or based on estimated amounts for funds that have been in existence less than one year), and have not been adjusted for current asset levels. If adjusted for any decrease or increase in assets, expense ratios would be higher or lower, respectively, than the numbers shown above. Please see the Fund's prospectus for additional details.
The Russell 1000 Value Index measures the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values. The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks. It is not possible to invest directly in an index.
